The 5 E-commerce Business Models

the 5 business models of e-commerce and online sales

It is tempting to think of e-commerce as simply a business model, especially when it is factored into an over-arching business strategy. But e-commerce has grown and diversified since its inception. Amazon alone has pioneered many different e-commerce business models. New players emerge all the time too, further exploiting the nuances.

All in all, there are 5 different primary business models for selling physical products online. They all vary from each other in some way, be it commercial strategy, logistics, or customer experience. Each business model has its own challenges and opportunities which I will outline in this article.

Services, and the -aaS models, are another form of online business (and a bigger one at that), but for this article I’m going to focus on commerce as a trading of goods.

Let’s get started.

#1. E-retail

For companies who sell through retail partners, e-retail is probably the first place they started to work with e-commerce as a revenue driver. Many e-retailers have been selling online for a long time, enabling brands to quickly leverage their distribution systems to get their products to consumers. Being experienced also means that e-retailers can apply best practices to optimize business for everyone.

There are other strengths. E-retailers have a larger financial capacity plus a stake in whether the products sell or not. Unlike marketplaces, that we will get to in a bit, e-retailers need to push sell-out. The good news is that they tend to have a lot of traffic because of all of the brands that are pushing their customers there. They also have client fidelity from the masses of people frequenting their physical locations. Omni-channel opportunities abound.

E-asy goes it

E-retail is complicated because sales negotiations are handled by key account and commercial teams, but oftentimes the responsibility of e-retail falls on the e-retail teams who do not have direct contact with the e-retailers at a local level. Inventory management is harder because media budgets and activations can have different outcomes that are less predictable than traditional trade activations.

One of the biggest challenges to e-retail is data. On the one hand, people who order from e-retailers hand over a lot of information when they create an account – information that the e-retail will happily use. What e-retailers will not happily do is pass information along to brand partners. Negotiations for data access need to happen during trade plans, which is not always the expertise of key account managers. Without data, brands have a much harder time tracking their ROI. And the omni-channel approach that I mentioned earlier is very hard to execute.

Another challenge is immersiveness. Product pages can be optimized and feature nice creatives but it is still a standard product page on a different site than a brand-owned property. Functionality for the brand is therefore limited, and if you’ve seen one e-retail product page, you’ve seen most of them.

#2. Pure Player

The same laments can be stated for the pure player model. When a pure player buys inventory, they are acting just like an e-retailer except, in most cases, without the offline presence. The classic examples are Amazon in the west and Alibaba in the east.

The good news about pure players is that they are growing rapidly thanks to the addition of services, innovative customer service models, and better logistics support.

Amazon is the best example of this, everything it does is designed to make getting something to you as fast as possible. Have a problem? Amazon will refund you immediately. It will now even send you clothes to try on before you buy, just send back the ones you don’t want and you’re only charged for what you keep.

The bigger the better

In fact, pure players are gaining advantages that are only possible at huge scale. Amazon is notorious for reinvesting every penny into optimizations. They’ve been doing that for 20 years. The result is that people’s expectations are changing. It’s no longer acceptable to wait indefinitely for a product when Amazon will deliver it to me that night at a time when I’m home.

For smaller players, it is almost impossible to compete. For brands, it’s almost impossible to ignore. Companies will pay dearly for talent that knows how to sell through pure players, leveraging the latter’s customer experience and logistics know-how to drive growth in sales.

It is still up to the brands to create product pages, develop marketing plans, and find ways to drive sell out. The added drawback is that there are no physical places to generate awareness or test out products. Data can be as hard to come by as with the e-retailers.

Because e-retail and pure players can be so complex and limiting in certain areas, many companies cut out the middle man and sell straight to their consumers.

#3. D2C

D2C (direct to consumer) might address some of the complexities of selling via e-retail, but it is by no means easier.

On paper, D2C is sound. A company or brand can create an environment that they control, branded how they like. There is no worry of people clicking away to competitors. There can be extra functionality, editorial content, content, and the possibility to create an account and thereby provide valuable insight directly to the brand.

Data is a big driver for D2C adoption. Learning who your customers are is incredibly valuable for obvious reasons, and so is the ability to track the performance of your media campaigns and the site itself through to the purchase. For media campaigns that drive to e-retailers, you generally lose the information as soon as someone clicks to the partner site.

On your own site, you can track conversions at every level. That gives you the ability to A/B test your media assets and conversion funnel. Even small improvements can add up to big differences in the bottom line.

Too good to be true?

All of this sounds really nice, but as the old adage goes, if a website goes online, but no one visits it, does it make sense?

The biggest challenge is traffic acquisition. If you don’t have a continual media budget (online or offline) to drive awareness and visitors, you’re going to need a content marketing strategy to drive customers inbound. That means that you’re not just in the business of selling but in creating editorial content too. You will need PR strategies to get people to post links to your site so you can gain more traffic in search. The restrictions on organic reach on social networks means budgets for Facebook. The old days of posting new content on social and driving people organically to your site are over.

Then there is logistics, and it’s not just about having a way to fulfil orders. Online shoppers demand rapid, low-cost (if not free) delivery when they buy straight from the brand. For smaller players with centralized distribution, this can mean shipping products over big distances quickly, either driving down margins or risking to anger the customer.

When you factor in the cost of setting up an e-commerce site, it can quickly become cost prohibitive. ROI needs to be the driving rationality, and for many businesses they just don’t have the percentage of sales happening in e-commerce to justify the investment in 2018.

#4 Marketplace

The marketplace model is really just another form on D2C that happens on a different platform than a proprietary site. The company is still responsible for all of the logistics, and it doesn’t sell inventory to the site where the sale is taking place.

Marketplaces give brands the potential to touch a wider audience of existing traffic that is already there. A company can create a storefront and the marketplace handles the transactions.

But marketplaces are generally characterized by their focus on price. People go to marketplaces to search and compare. That puts brands directly into pricing battles which could end up hurting the brand image.

A brand certainly doesn’t have to subscribe to those tactics if they have other sources of traffic. But if they had other traffic drivers, why would a brand voluntarily put themselves in a place they couldn’t control, lose access to consumer data, and not just create their own D2C site? One answer is benign, the other is more startling.

The threat from marketplaces

Not every company that wishes to sell D2C can afford a roll out of a full-bodied e-commerce site. That’s the benign reason. If money is short, marketplaces provide all the digital infrastructure you need to start selling almost immediately.

But if you’ve taken a look at popular marketplace sites like Amazon’s marketplace or eBay, you might’ve been shocked to see something: your products! Resellers – often unauthorized or “partially” authorized – are probably already selling your stuff on marketplaces for you. It might just be your distributors selling your products for you in their markets, or it might be scammers who buy in bulk to resell, or it might be individuals. The result is that you have a market of your products that you are not directly involved in.

That makes having a discussion about creating a presence on marketplaces a top priority, to be present when people search and to give them a legitimate place to buy.

#5. Social commerce

Just like the individuals on marketplaces who might be selling your products, businesses are increasingly selling via individuals directly on social networks. It’s called social commerce and it’s the newest of the 5 e-commerce business models.

Social commerce is a bit like affiliate sales. Brand ambassadors are essentially salespeople who obtain awareness by pushing products to their networks. When those people generate sales, they get a commission. In some extreme cases – think the door-to-door knife salesman – those people also handle the transaction and delivery of products. It’s more common for people to get their contacts to buy with a special code or link to track the sale that happens on a brand’s D2C site or marketplace.

Social commerce helps to address some of the challenges of getting your message out there. Organic reach has been reduced to almost nothing on Facebook, so you need ways to break out of the traditional publisher/audience model. Social commerce is increasingly happening on messaging platforms like WhatsApp among groups and networks that already exist. Like I’ve preached before, if you don’t have your own network, use other people’s networks. Ambassadors can leverage social networks in ways that brands can’t.

Link tracking has gotten much better as well, lubricating the e-commerce sales process and the speed at which people can convert. Buy buttons are popping up across social networks and will soon become commonplace – even for individuals.

The Wild West

You can’t make people like stores, and social selling is basically giving the control over to the masses. Many brands would never dream of doing that for fear of severely degrading the customer experience. Any luxury brand – like Apple – will tell you that customer experience and particularly controlling the sales experience is one of the biggest differentiators in terms of perceived value and positioning.

But for functional products meant for mass market adoption, social selling could become huge. You know how Facebook turns certain words automatically into different colors, like Congratulations? Imagine if that word is turned into a link where I can click to buy it immediately. What happens if the person who wrote the word got a commission on that sale? Anything that was trending could immediately be monetized. In the long run Amazon would buy Facebook turning our conversations and daily interactions into a never-ending stream of continuous purchasing opportunities and where users get compensated the more the use it…

In Conclusion

I’m getting a little ahead of myself here, sorry about that. It’s just that the future is so exciting because we don’t know what it’s going to look like!

The point is that e-commerce is a conglomeration of multiple different business models, each with the potential to drive business in its own way. For almost all brands, e-commerce should be a priority. The road that companies take to execute that strategy will have a big impact on how the customer experience evolves just as much as how the ROI is calculated.

Do you have more questions about the basics of e-commerce? Want to talk about you specific business situation? I’d love to help. Please get in touch or leave a comment below.

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